Navigating the Start-Up Business Exemption
Alberta has struggled through low oil prices, high unemployment rates, and a global pandemic. Through this turbulence our firm has witnessed an old adage coming true: when one door closes another one opens.
We’re seeing a new wave of Albertans ditching their steady salaries to build independent income streams. New business owners should understand how to raise enough capital to get their businesses off the ground.
To raise capital, businesses generally have to file a prospectus, a lengthy document that can cost anywhere from $50,000 to $500,000. Canada’s provincial security commissions have created exemptions that let corporations and business owners raise capital and issue equity without the financial burden of filing a prospectus.
The Prospectus Exemption for Start-Up Businesses in Alberta was implemented by the Alberta Securities Commission (ASC) in 2016 to help small businesses sell securities directly to investors. Better known as the Start-up Business Exemption, this new rule lets any Alberta-based start-up raise an aggregate of $250,000 in any business distribution, up to a lifetime total of $1,000,000.
How to Qualify for the Start-up Business Exemption
To qualify for the Start-up Business Exemption, the corporation issuing securities must have the following characteristics:
- The business cannot be an investment fund or a public company in Canada
- The head office must be in Alberta
- You must issue eligible securities
- You must submit an offering document to the buyer
- The amount raised cannot be above $250,000
- Individual buyers cannot invest more than $1,500
- You cannot use this exemption more than twice per calendar year
Eligible Distributions in Alberta
Under the Start-up Business Exemption is Rule, issuers may only distribute the following securities:
- Common shares
- Securities convertible into common shares
- Limited partnership units
- Non-convertible debt securities linked to a fixed or floating interest rate
- Non-convertible preferred shares
- Non-convertible preferred shares issued as eligible securities by a cooperative under Alberta’s Cooperatives Act
The Disclosure Requirements
If you’re an Albertan company planning to issue securities under the Start-up Business Exemption, you have to satisfy Alberta’s disclosure requirements by preparing an offering document for investors using Form 45-517F1 – Start-Up Business Offering Document.
The offering document is intended to help investors make reasonable and informed decisions and needs to include details about:
- Your business and management team
- Your intended financing:
- the jurisdiction
- the minimum amount you are required to raise before closing
- How you’re planning to use the investment capital
- How you’ve utilized previous investment capital
- Risk factors affecting your business
- Restrictions on the resale of securities
- The investors’ rights
Compared to filing a prospectus exemption, Form 45-517F1 requires fewer details about each of the items above. Better yet, there is no requirement to disclose any financial statements to regulators.
However, if any statement made in the offering document is either untrue or becomes untrue before the financing round closes, then the issuer is obligated to update their offering document.
Limitations on Raising Capital Under the Start-up Business Exemption
Issuing firms can raise up to $250,000 per distribution, with a maximum of two distributions per calendar year. Firms can raise a maximum lifetime amount of $1,000,000.
How Much Can a Firm Raise From a Single Buyer?
Under the Start-Up Business Exemption, buyers can invest a maximum of $1,500 per distribution. If buyers receive positive suitability advice with respect to the transaction, they can invest up to $5,000 per distribution.
Permitted Fundraising Vehicles
There are three paths to raising capital as an Albertan start-up.
- Start-ups can crowdfund through an online portal.
- Secondly, companies may raise funds through the issuer’s network of contacts – so long as their contacts are not in the business of trading securities.
- Lastly, issuers can raise capital through a registered dealer who is permitted to solicit investments and distribute securities via traditional channels.
Before any of these routes can be taken, start-up companies must comply with Alberta’s registration requirements.
Closing of Distribution under this Rule
Before any financing round can be completed under the Start-Up Business Exemption, you must receive a signed risk acknowledgement from each investor that details the dangers of investing in your business.
Further, investors must have the contractual right to withdraw their purchase offer up to 48 hours after the time of subscription. If an investor decides to pull their portion of the investment round, you have a 90 day window to raise the minimum offering amount before those funds must be returned to the purchaser.
Uncertainty Breeds Opportunity
In closing, Albertans are using our uncertain economic climate as an opportunity to bet on themselves and start their own businesses. Anyone looking for a budget-friendly means of financing their business plan should consider the Start-up Business Exemption.